Institutional Designs for a Complex World: Bargaining, Linkages, and Nesting 9781501733123

Table of contents :
Contents
Contributors
Preface
Abbreviations
1. Reconciling Multiple Institutions: Bargaining, Linkages, and Nesting
2. Nested Institutions and the European Monetary System
3. An Empty Nest? Reconciling European Security Institutions in the Bosnian Crisis
4. The Failure of the Nest-Best Solution: EC-EFTA Institutional Relationships and the European Economic Area
5. When Giants Clash: The OECD Financial Support Fund and the IMF
6. Institutional Nesting: Lessons and Prospects
Index

Citation preview

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Institutional Designs for a Complex World

/

Institutional Designs for a Complex World Bargaining, Linkages, and Nesting

Edited by

Vinod K. Aggarwal

Cornell University Press Ithaca and London

2 9 1999 %/ry of ^

Copyright © 1998 by Cornell University All rights reserved. Except for brief quotations in a review, this book, or parts thereof, must not be reproduced in any form without permission in writing from the publisher. For information, address Cornell University Press, Sage House, 512 East State Street, Ithaca, New York 14850. First published 1998 by Cornell University Press First printing, Cornell Paperbacks, 1998 Printed in the United States of America LIBRARY OF CONGRESS CATALOGING-IN-PUBLICATION DATA

Institutional designs for a complex world: bargaining, linkages, and nesting / edited by Vinod K. Aggarwal. p.

cm.

Includes index. ISBN 0-8014-3460-2 (alk. paper). — ISBN 0-8014-8464-2 (pbk. : alk. paper) 1. International agencies—Social aspects. change.

3. Organizational behavior.

2. Organizational

4. Negotiation.

I. Aggarwal,

Vinod K. JZ4850.I57

1998

302.3'5—dc2i

98-18839

Cornell University Press strives to use environmentally responsible suppliers and materials to the fullest extent possible in the publishing of its books. Such materials include vegetable-based, low-VOC inks and acid-free papers that are recycled, totally chlorine-free, or partly composed of nonwood fibers. Cloth printing

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Paperback printing

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Contents

vii

Contributors Preface

ix

Abbreviations

xi

1. Reconciling Multiple Institutions: Bargaining, Linkages, and Nesting

i

Vinod K. Aggarwal

2. Nested Institutions and the European Monetary System

32

Steven Weber

3. An Empty Nest? Reconciling European Security Institutions in the Bosnian Crisis

84

Beverly Crawford

4. The Failure of the Nest-Best Solution: EC-EFTA Institutional Relationships and the European Economic Area

124

Cedric Dupont

5. When Giants Clash: The OECD Financial Support Fund and the IMF

161

Benjamin J Cohen

6. Institutional Nesting: Lessons and Prospects

195

Vinod K. Aggarwal

215

Index v

Contributors

Vinod K. Aggarwal is Professor in the Department of Political Science, Affiliated Professor in the Haas School of Business, and Director of the Berkeley APEC Study Center (BASC) at the University of California, Berkeley Benjamin J. Cohen is Louis G. Lancaster Professor of International Political Econ¬ omy at the University of California, Santa Barbara Beverly Crawford is Lecturer in the Political Economy of Industrial Societies Pro¬ gram and Research Director of the Center for German and European Studies at the University of California, Berkeley Cedric Dupont is Assistant Professor at the Graduate Institute of International Studies, Geneva Steven Weber is Associate Professor in the Department of Political Science at the University of California, Berkeley

Vll

Understanding the creation of international institutions has long been central to the study of world politics. By contrast, less attention has been paid to the problem of how existing institutions are modified and how new and old institu¬ tions might be reconciled. These questions are particularly important in the con¬ text of Europe, with its long history of institutionalization and current efforts to adapt and build new arrangements. As institution building proceeds in other parts of the world, insights from the European experience may help shed light on this process. This book could not have been written without the generous financial support of the Center for German and European Studies at the University of California. The Center’s recent director, Richard Buxbaum, and its current director, Gerald Feldman, provided guidance and encouragement throughout the project. Going beyond the call of duty, Gerald Feldman attended two workshops at Berkeley in December 1994 and December 1995 and provided intellectual stimulus for the participants. The staff of the center, particularly Gia White, greatly facilitated the management of the project. Beverly Crawford, research director of the cen¬ ter, not only supported the intellectual thrust of the project but agreed to con¬ tribute a chapter to the volume. At the Berkeley workshops, several scholars pro¬ vided valuable comments on earlier drafts of the papers. Christopher Ansell, Ole Roste Bjorn, Eileen Doherty, Elizabeth Kier, Jonah Levy, and Paolo Guerrieri served ably as discussants and stimulated valuable revisions. The contribu¬ tions of additional colleagues are acknowledged in each of the chapters. Earlier versions of these chapters were presented at roundtables in September 1995 at the annual meeting of the American Political Science Association and in April 1996 at the annual meeting of the International Studies Association. The essays also appeared in 1996 in the Working Papers series of the UC Center for German and European Studies. As editor of the volume, I have benefited from the research and organizational support of several research assistants, including Nikolaos Biziouras, Kristine ix

Preface Davidson, Sylvia Donati, Laboni Hoq, David Kang, Gregory Linden, Trevor Nakagawa, Jacob Okun, Rose Razaghian, and David Stuligross. I am grateful to the participants in the project who greatly contributed to the overall design and execution of this work. My introductory and concluding essays are consid¬ erably richer for their comments and criticisms. I am especially thankful to Ce¬ dric Dupont for spending so much time with me to reconceptualize and tighten the theoretical framework. The book as a whole has also benefited greatly from two anonymous reviewers whose comments both I and the authors found of im¬ mense usefulness. Roger Haydon, editor for Cornell University Press, has been especially help¬ ful. He ensured that the manuscript received a prompt external review, advised me on revising it, and has ably shepherded it through the publication process. On a personal note, I thank my family for their continuing support. My par¬ ents, Om and Saroj Aggarwal, have worked hard to encourage my research and take on tasks that would facilitate my ability to concentrate on my academic work. Sonia, my seven-year-old daughter, has developed into an able research assistant and encourages me to publish by keeping a dust jacket of my last book on her desk. I have been especially fortunate to have the moral support of my wife, Nibha Aggarwal. Her own grueling work schedule while she completed her MBA has been an inspiration. I dedicate my contributions in this volume to her for making our home a happy nest.

Vinod

Berkeley, California

K. Aggarwal

Abbreviations

APEC

Asia-Pacific Economic Cooperation

ASEAN

Association of South East Asian Nations

BDF

Banque de France

BIS

Bank for International Settlements

CAP

Common Agricultural Policy

CDU

Christian Democratic Union

CFSP

Common Foreign and Security Policy

CMEA

Council of Mutual Economic Assistance

CPR

Common Pool Resources

CSCE

Conference on Security and Cooperation in Europe

EAEC

East Asian Economic Caucus

EC

European Community

ECB

European Central Bank

ECJ

European Court of Justice

ECU

European Currency Unit

EEA

European Economic Area

EEC

European Economic Community

EFTA

European Free Trade Area

EMM

European Monitoring Mission

EMS

European Monetary System

EMU

European Monetary Union

EPC

European Political Cooperation

ER

Exchange Rate

ERM

Exchange Rate Mechanism

EU

European Union

FDI

Foreign Direct Investment

FSF

Financial Support Fund

FTAA

Free Trade Area of the Americas

C-7

Group of Seven Industrial Nations

Abbreviations

G-io

Group of Ten Industrial Nations

GATT

General Agreement on Tariffs and Trade

GEMU

German Economic and Monetary Union

GNP

Gross National Product

HDZ

Croatian Democratic Union

HLNG

(Joint EC-EFTA) High-Level Negotiating Group

IBRD

International Bank for Reconstruction and Development

IEA

International Energy Agency

IFOR

Implementation Force

IMF

International Monetary Fund

ITO

International Trade Organization

JNA

Yugoslav National Army

MERCOSUR

Common Market of the South

MFA

Multi-Fiber Arrangement

MFN

Most Favored Nation

MTFA

Medium Term Financial Assistance

NAFTA

North American Free Trade Agreement

NATO

North Atlantic Treaty Organization

OECD

Organization for Economic Cooperation and Development

OPEC

Organization of Petroleum Exporting Countries

OSCE

Organization for Security and Cooperation in Europe

PD

Prisoner’s Dilemma

RPR

Rassemblement Pour la Republique

SDR

Special Drawing Rights

SEA

Single European Act

SFF

Supplementary Financing Facility

SPD

Socialist Democratic Party

STMS

Short Term Monetary Support

UN

United Nations

UNCTAD

United Nations Conference on Trade and Development

UNHCR

United Nations High Commission for Refugees

UNPROFOR

United Nations Protection Force

VSTF

Very Short Term Financing Facility

WEU

Western European Union

WTO

World Trade Organization

xn

Institutional Designs for a Complex World

%

Chapter One

Reconciling Multiple Institutions: Bargaining, Linkages, and Nesting Vinod K. Aggarwal

International institutions are rarely created in a vacuum. When new institu¬ tions are developed, they often must be reconciled with existing ones.1 One ap¬ proach to achieving such reconciliation is the nesting of broader and narrower institutions in hierarchical fashion. Another means of achieving harmony among institutions is through a division of labor, or “parallel” linkages. The challenge of institutional reconciliation is not, however, unique to the creation of new in¬ stitutions. In lieu of creating new ones, policymakers may modify existing insti¬ tutions for new purposes. When doing so, they must also focus on issues of insti¬ tutional compatibility. Moreover, bargaining over institutional modification is likely to be strongly influenced by existing institutions. The post-Cold War era is likely to increase the difficulty of crafting and rec¬ onciling international institutions. As in the 1940s and 1970s eras of changing re¬ lationships among major powers, current power shifts in the international sys¬ tem have created stresses for a variety of institutions. In particular, changing For financial support, I am grateful to the Center for German and European Studies at the University of California. Some of the theoretical ideas were developed while I was a Visiting Fellow at the East-West Center in Honolulu, whose hospitality I greatly appreciate. For comments on ear¬ lier versions, I am especially indebted to Cedric Dupont, and thankful to Muthiah Alagappa, Pierre Allan, Christopher Ansell, Benjamin Cohen, Beverly Crawford, Paolo Guerrieri, Ernst Haas, Guy Holburn, Robert Keohane, Sumner La Croix, Aija Leiponen, Jeff Macher, Steven Weber, and Yaacov Vertzberger. Kristine Davidson, Sylvia Donati, Nikolaos Biziouras, and Trevor Nakagawa provided able research assistance.

1 I use the term “institution” to refer to the combination of a meta-regime and a regime. For a discussion of these terms, see the first section of this chapter.

/

Vinod

K. Aggarwal

power relationships in the international security system, marked by the demise of the Soviet Union and the rise of China, have challenged the post-World War II consensus among Western powers. The future role of NATO and its relationship to the United Nations and European institutions have become a subject of contro¬ versy. Within the Asia-Pacific area, the role of the United States and the possible need for security institutions have become matters of debate. In the economic realm, long delays in the negotiation of the Uruguay Round and the creation of regional accords in trade such as NAFTA and APEC have fostered concerns about undermining the World Trade Organization. In the heavily institutionalized European arena, efforts to move toward monetary union have created dissension in the European Union. In short, the problem of institutional reconciliation, par¬ ticularly through nesting, is likely to become an increasingly important issue in in¬ ternational bargaining. Understanding this process is the central task of this vol¬ ume. In the first section of this chapter, I discuss some basic concepts related to the understanding of institutions and provide examples of different modes of insti¬ tutional reconciliation. I then develop the notion of an “institutional bargaining game’' in the second section. Specifically, I suggest that we can construct these bargaining games based on three elements: (i) the types of “goods” that are in¬ volved in the issue-area of concern; (2) the “individual situation” of actors— defined by their international power position, domestic coalitions, and politi¬ cians’ beliefs, which influence actors’ national positions;2 and (3) the presence or absence of institutions within which bargaining takes place. By drawing on and developing theoretical ideas from different schools of thought about institutional change, I then show how these three elements will determine the structure of the bargaining game. Set in motion by varying stimuli, these institutional bargaining games will generally result in differing payoffs for actors. Faced with undesirable payoffs, some actors may attempt to modify the bargaining game in which they find themselves. The methods and results of these attempts provide the focus for the third section, where I show how actors can use power resources to manipulate the three elements (goods, individual situations, and institutions) that define the institutional bargaining game. In this book our primary focus will be on actors’ efforts to change the institutional games—rather than their efforts to manipulate goods or individual situations directly. Whether actors create new institutions or only modify existing ones, they must decide on the characteristics of the institution (multilateral versus bilateral, as well as the strength and nature of the arrangements) and also on a bargaining

2 See Aggarwal 1989 and 1996 on both the concepts of individual situations as well as parallel and nested linkages (discussed below).

2

Reconciling Multiple Institutions route to establish these characteristics. Drawing on existing schools of thought about institutional change, the fourth section provides a theoretical rationale for the actors’ choices, and it asks the key question of how actors choose appropri¬ ate forms of institutional linkages. Actors must decide if some institutions (or is¬ sues) will be subordinated to others, or if they will be reconciled by a division of labor among institutions. In view of our emphasis on bargaining in the context of existing institutions, the fifth section reviews the book’s empirical cases. These cases all have a Europeanrelated focus.3 Europe has a history of institutional richness, beginning in the post-World War II era with the European Economic Goal and Steel Com¬ munity, which then, over time evolved into the complex European Union. In particular, Steven Weber’s chapter examines questions of institutional con¬ straints and institutional deepening in the context of the crisis of the European Monetary System. He looks at how the nested nature of institutions in this area prevented a collapse of this system. Institutional challenges have also arisen from the problem of integrating new members into the community, either on a caseby-case basis, or in a broader effort such as the European Economic Area (EEA). Cedric Dupont examines this failed institutional effort to bring together the EC and EFTA. In the security area, we have seen an active role by NATO as well as the Conference on Security Cooperation in Europe (CSCE) and the Western European Union (WEU). How these different institutions might work together in coping with crises has yet to be resolved; they provide the subject of Beverly Crawford’s chapter on the Bosnian crisis. Finally, Benjamin Cohen’s study fo¬ cuses on the interaction of the United States and European countries in the con¬ text of a combined economic and security crisis—the 1973—74 OlI Crisis. In par¬ ticular, Cohen examines the difficulty of creating new institutions to address this crisis in the context of existing financial arrangements. In view of our concern with institutionalized areas, the European arena provides an ideal setting to ex¬ amine cases of institutional modification and reconciliation.

The Analytical Framework: An Overview

We begin with an overview of the institutional bargaining process to get a bet¬ ter grasp of the specific question of institutional reconciliation. Figure 1.1 depicts the elements of the institutional bargaining problem. Starting with the center of the chart, we can distinguish between two aspects of institutions: meta-regimes ! For an insightful discussion of the prospects for European institutions after the Cold War see Keohane, Nye, and Hoffman 1993. 4 See Aggarwal 1985. Zacher (1987 and 1996) uses the distinction developed in this work in his analysis of regimes.

3

Vinod

FIGURE

1.1.

K.

Aggarwal

The institutional bargaining problem

and regimes.4 Whereas the term meta-regimes represents the principles and norms underlying international arrangements, the term international regimes refers speci¬ fically to rules and procedures. Regimes can be examined in terms of strength, nature, and scope. “Strength” refers to the stringency of the multilateral rules that regulate national behavior; “nature” (in an economic context) refers to the degree of openness promoted by the accord; and “scope” refers to both the number of issues incorporated in the regime—issue scope—and the number of actors involved (bilateral or multilateral)—institutional scope. In this book, we focus primarily on institutional scope. International regimes, whether multilateral or bilateral, are developed to reg¬ ulate the actions of states. The term national controls can include unilateral actions or ad hoc bilateral or multilateral accords. These measures in turn affect the types and levels of interactions that we observe in particular issue areas. Examples of interactions, which primarily result from nongovernmental activities by pri¬ vate actors, include trade, investment, or short-term capital flows.5 These actions are affected by changing technology, tastes, and modes of organization. Such el¬ ements provide the driving factors behind the changing supply and demand of products and services as well as the interaction that results from exchange among private actors within states.6 In an apolitical world, we could imagine a closed loop with societal actors engaging in interactions without the presence of any types of governance structures—be they national controls, ad hoc agree¬ ments, or institutions—to influence these activities.

5 In security matters, for example, we could examine weapons flows, the movement of fissionable materials, and so on. 6 This emphasis on private actors does not, of course, rule out the direct exchange of goods and services by states themselves, but merely reflects the primary mode of exchange at this level.

4

Reconciling Multiple Institutions Changes in interactions will influence state and societal actors. Bargaining among states is generally stimulated by some type of impetus, which occurs through significant changes in existing patterns of interaction as a result of changes in governance patterns or economic changes.7 This often creates some type of externality or affects the provision of goods; states then respond to these changes in light of what I have termed their individual situations. The result is a bargaining game among states that takes place in either an institutional or noninstitutional setting. As noted earlier, our focus in this book is on cases of bar¬ gaining where institutions already exist. Thus, the next step concerns states’ de¬ cisions on whether to use or adapt existing institutions, or whether to create new ones. Regardless of whether institutions are adapted or newly created, our primary focus is on understanding how they might fit with existing institutions (see figure i.2.). Actors must decide on how the institutions they adapt or create will be rec¬ onciled with existing arrangements—that is, through nesting or by parallel con¬ nections. A few examples will illustrate these ideas. One can think about the problem of reconciling institutions from both an issue-area and a regional perspective.8 Nested institutions in an issue-area are nicely illustrated by the relationship be¬ tween the international regime for textile and apparel trade (the Long Term Arrangement on Cotton Textiles and its successor arrangement, the Multifiber Arrangement) with respect to GATT. In the 1950s, continental European pro¬ tectionist measures in textile and apparel trade were inconsistent with GATT’s objectives and eroded American efforts to bolster an open multilateral trading system. At the same time, in the early 1960s, President John F. Kennedy faced strong protectionist lobbying efforts from the cotton textile and apparel indus¬ tries. In view of Kennedy’s desire to promote a new round of tariff reductions, the U.S. government found itself in a quandary. To cope with these competing pressures, it promoted the formation of a sector-specific international regime under GATT auspices. This “nesting’’ effort ensured a high degree of confor¬ mity with both GATT’s principles and norms as well as with its rules and pro¬ cedures.9 Although the textile regime deviated from some of those norms in permitting discriminatory treatment toward developing countries, it did adopt and adapt the most-favored nation norm, treating all developing countries 7 Societal actors can, of course, also affect other states directly, but I have not shown these links here so as to simplify the charts and presentation. 8 See Oye 1992 for a good discussion of regionalism. Also see Gamble and Payne 1996 and Lawrence 1996, among others. 9 See Aggarwal 1985 for a discussion of nested systems and institutions in the context of sectoral arrangements. Also see Aggarwal 1994 for analysis of institutional nesting in a regional context in North America and the Asia-Pacific region as well as an analysis of APEC’s options. The term nest¬ ing has been used by Barkun (1968) to examine hierarchical systems.

5

Vinod

figure 1.2.

K.

Aggarwal

Reconciling multiple institutions

alike. Moreover, while allowing protection against imports, the textile regime remained at least partially consistent with GATT norms that fostered trade openness by calling for the gradual liberalization of restrictive measures. For an example of the nesting of regional institutions, we can turn to the de¬ velopment of the Asia-Pacific Economic Cooperation grouping (APEC) in 1989 and its relationship to GATT. APEC’s founding members were extremely wor¬ ried about undermining GATT and sought to reconcile these two institutions by focusing on the notion of “open regionalism.” In justifying this accord, APEC members saw “open regionalism” as a better alternative than the use of Article 24 of GATT, which permits the formation of free trade areas and customs unions. Although the interpretation of “open regionalism” continues to be con¬ tested, the idea behind this concept was that while the members of APEC would seek to reduce barriers to goods and services amongst themselves, they would do so in a GATT-consistent manner. The ways to achieve this consistency include dealing with non-GATT issues or pursuing unilateral liberalization measures that would be open to all GATT signatories—whether or not they are members of the APEC grouping. An alternative mode of reconciling institutions would be to simply create “parallel” institutions that deal with separate but related activities, as exempli¬ fied by the GATT and Bretton Woods monetary system. In creating institutions for the post-World War II era, policymakers were concerned about a return to the 1930s era of competitive devaluations, marked by an inward turn among states and the use of protectionist measures. As a consequence, they focused on creating institutions that would help to encourage trade liberalization. By pro¬ moting fixed exchange rates through the IMF and liberalization of trade 6

Reconciling Multiple Institutions through GATT (following ITO’s failure), policymakers, hoped that this parallel institutional division of labor would lead to freer trade. Also on an issue-area basis, one example of institutional modification and reconciliation involves the shifting roles of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD, the World Bank). Whereas the two institutions had a clearer division of labor based on short-term versus long-term lending as originally formulated in the 1940s, more recently this divi¬ sion has become fuzzier and a potential source of conflict.

-

Finally, on a regional basis, one can see the development of the European Economic Coal and Steel Community and the Western European Union as par¬ allel organizations. The first was oriented toward strengthening European coop¬ eration in economic matters (with, of course, important security implications), while the second sought to develop a coordinated European defense effort. We now turn to a more specific discussion of the concept of an institutional bargaining game, which we will consider as an approach to the process of insti¬ tutional transformation and reconciliation.

Specifications of the Institutional Bargaining Game

The key task of this section is to describe the elements (goods, individual situ¬ ations, and institutions) that constitute an institutional bargaining game and then to show how they fit together to yield game payoffs. (See figure 1.3A.) This figure serves as the basic framework to set up bargaining games for the empirical chapters. Goods and externalities: Public, CPR, patented, and private

Initial impetus resulting from changes in interactions fnnf nfrortc fno

Individual situations: Different national reactions based on capabilities, domestic coalitions, and beliefs

Bargaining game with payoffs in an institutional context

Game outcome

--► Game outcome

(Non-institutional bargaining game with payoffs)

FIGURE 1.3A.

The institutional bargaining game

Vinod K. Aggarwal

The Initial Impetus In general, an initial impetus significantly alters the preexisting bargaining context. Examples include the Oil Shock of 1973, the breakdown of the Bretton Woods system in 1971, and the end of the Gold War following the collapse of the Soviet Union. An impetus can also come from both endogenous and exogenous changes that are less dramatic, such as actions by currency speculators or elec¬ toral victories that shift actors’ individual situations. These changes, which can be either directly related to the issue at hand or affect the broader institutional context within which an issue is being negotiated, will create differing incentives for actors.

Goods and Externalities Initial shocks may either create a positive or negative externality on actors who are not immediate participants in the precipitating event. Alternatively, eco¬ nomic or political changes may stimulate or impede the provision of some type of goods, namely public goods, common pool resources (CPRs), inclusive club goods (or what I have termed “patented goods”), or private goods.10 Differences among goods can be characterized along two dimensions: jointness, which refers to the extent to which goods are affected by consumption; and the possibility of exclusion, which refers to whether noncontributors to the provision of goods can be kept from consuming them.11 In the case of public goods (e.g., national defense), actors face a collective ac¬ tion dilemma because all can benefit from their joint nature. However, because exclusion is not possible, beneficiaries need not contribute to their creation or maintenance. In such cases, analysts have focused on the incentives for differ¬ ently situated states to provide public goods. The classic representation of the provision problem for public goods is the n-person prisoners’ dilemma: in such cases, cooperation can potentially help all players, but actors’ dominant strategy is to defect, in which case, the goods may not be provided.12 Common pool resource goods include global commons concerns such as fish¬ ery resources or goods where exclusion of noncontributors from consumption of the goods is not feasible.13 In such cases, providers of goods risk being exploited

10 For a discussion of these four types of goods and actors’ motivations to provide them, see Aggarwal 1996. On common pool resources in particular, see Ostrom 1990. For an earlier insightful discussion of types of goods see Snidal 1979. The best summary of the literature on goods is by Cornes and Sandler 1996. 11 See Snidal 1979. 12 Hardin 1982. 13 For a good discussion of CPRs and international institutions, see Keohane and Ostrom 1994.

8

Reconciling Multiple Institutions

since they will not only end up paying for the cost of the goods, but will also suffer from free riding that will diminish the goods. Thus, at least in principle, the provision of such goods will be a more severe form of the prisoners’ di¬ lemma. Inclusive club goods, or “patented goods,” refer to the type of goods that ex¬ hibit jointness (i.e., those that are not diminished by use), but where exclusion is possible. Two examples of this type of good are the provision of satellite trans¬ mission of television and the use of scrambling technology to prevent noncon¬ tributors from accessing certain broadcasts. Because of the benefits of having additional consumers, we might expect that, in the case of international institu¬ tions, actors would compete to have their institutional approach adopted as the standard by all participants to maximize their revenue possibilities. Private goods, which reflect the possibility of exclusion but not jointness, refer to goods that are diminished by use. Individual actors will have an incentive to produce these goods and to charge according to the marginal cost of extension of these goods. To better understand the implications of this basic characterization of these various types of goods, we also need to consider the effects of actors’ individual situations and the institutional context within which interaction takes place. Put differently, goods only give us a first cut into understanding the type of problems that actors face and their incentives: knowledge of the types of goods involved in bargaining does not allow us to adequately determine specific payoffs because the position of national actors or the institutional setting may alter the bargain¬ ing problem.

Individual Bargaining Situations

States are likely to have varying interests in the issue-area within which bar¬ gaining takes place. While the factors that might affect actors’ interests (and hence their payoffs) are nearly endless, the most significant influence on national responses can be narrowed down to (i) an actor’s international position, as defined by its issue-specific and overall capabilities; (2) its domestic coalitional stability; and (3) elite beliefs and ideologies. The first of these elements refers to both the actors’ position in the overall international system as well as to its rela¬ tive capabilities in the specific issue-area under discussion. These factors will in¬ fluence a state’s objectives as well as its ability to secure its desired outcomes. The second element, a state’s domestic coalitional stability, focuses on the in¬ cumbency expectations of government decision makers. This variable taps into decision makers’ discount rates. For example, in debt rescheduling negotiations, domestically unstable governments are more reluctant to undertake sharp eco¬ nomic adjustment measures for fear that they will be ousted. Finally, elite beliefs 9

Vinod K. Aggarwal and ideologies about the causal connections among issues and the need to han¬ dle problems on a multilateral basis will also influence the payoffs and actors’ re¬ sponses. In earlier work, I have examined the influence of certain factors—issue capa¬ bilities, overall capabilities, and domestic coalitional stability—on actors’ basic goals.14 I have constructed preference orderings for actors in order to set up games of strategic interaction in a noninstitutional context, and I have solved these games for equilibria to predict the likely outcome of bargaining. In the es¬ says in this volume, the authors do not formally specify a complete preference ordering for each actor in order to construct bargaining games. But they do sys¬ tematically consider how these factors influenced state preferences and choices in setting up the initial bargaining game.

The Institutional Context As states attempt to secure their preferred outcomes, they will interact strate¬ gically, possibly in the context of one or more institutions. Institutions should in¬ fluence how actors interact, and may provide either focal-point solutions for co¬ ordination games or may help states to overcome collective action problems.15 Institutions are also likely to have important distributive consequences and may influence actors’ bargaining behavior by tying the hands of both other interna¬ tional actors and domestic ones.16 More significantly, some analysts argue that international institutions may lead to fundamental changes in actors’ basic in¬ terests and possibly facilitate greater cooperation.17

Constructing Institutional Bargaining Games We can now attempt to combine the three elements, goods, individual situa¬ tions, and institutions, to gain insight into different types of institutional bar¬ gaining games. Understanding how such games are constituted will also give us insight into the strategies that actors might subsequently pursue in an attempt to change the games in which they find themselves. It is worth noting that an exact a priori specification of the effect of the three elements on game payoffs—absent a specific empirical issue-—is a difficult if not impossible task; instead, the discus¬ sion below focuses on some general considerations of the effects of different ele¬ ments. Before examining specific hypotheses with respect to game construction, 14 See Aggarwal 1989 and 1996. 15 See Stein 1983, Snidal 1985a, Axelrod and Keohane 1985, and Martin 1992, among others. 16 See Aggarwal 1985 and below on the use of institutions to control other actors. For additional discussions, see Krasner 1991 and Knight 1992. 17 See, for example, Haas 1980.

10

Reconciling Multiple Institutions it is useful to briefly review some of the standard schools of thought on the de¬ velopment of institutions. Hegemonic stability theorists suggest that institutions reflect power balances and argue that the demise of global-level institutions is an inevitable result of the relative decline of the United States in the international economic system.18 The focus of this approach—which I label neorealist institutionalism to differentiate it from realists who see no role for international institutions—is on the distribu¬ tional consequences of international regimes or arrangements.19 In contrast to neorealist institutional approaches, neoliberal institutionalists suggest that institutions^ will be more robust. Based on transaction cost ap¬ proaches, they theorize that because global accords help to foster cooperation among states and provide them with ongoing benefits, cooperation “after hege¬ mony” can be sustained.20 The essence of this argument is that states are able to reduce organizational and information costs through the use of institutions, par¬ ticularly when “issue-density” is high. One of the key functions of regimes is to reduce the costs that would come from having to negotiate a host of bilateral agreements with other states.21 Moreover, regimes also help to provide informa¬ tion to the participants, with their secretariats or staff keeping track of the ac¬ tions of member states. Finally, institutional innovation and change has been examined with a focus on the role of expert consensus and the interplay of experts and politicians.22 New knowledge and cognitive understanding may lead decisionmakers to calcu¬ late their interests differently. For example, politicians may use linkages to create new issue packages in international negotiations to form international regimes.23 This focus on types of linkages, combined with the ideas developed here, helps us to significantly increase our understanding of the dynamics of institutional change. Turning now to the specific question of game construction in relation to goods and individual situations, the neorealist institutionalist school hypothe¬ sizes that hegemonic powers will be willing to provide public goods and allow free riding because of purely economic calculations (as when an owner of a large number of ships pays for a lighthouse). Put differently, we should expect actors’ 18 There is an extensive literature on this subject. See, among others, Kindleberger 1973, Gilpin 1975, and Krasner 1976. 19 I have not seen this term used before. Moravcsik (1992) does point to the difference between realist and liberal conceptions of institutions, but does not use the term neorealist institutionalism. 20 After Hegemony is the title of a book by Robert Keohane (1984) that provides the best exemplar of the neoliberal institutionalist perspective. Keohane draws upon the work of Williamson (1975) in discussing transaction-cost approaches. 21 Keohane 1982 and 1984. 22 See E. Haas 1980 and P. Haas 1989, among others. 23 E. Haas 1980.

II

Vinod

K. Aggarwal

payoffs to vary as a result of their differing positions, possibly changing the nature of the game as initially suggested by the goods involved. Lisa Martin presents an example of this by showing how a prisoner’s dilemma game turns into a “sua¬ sion” game when a hegemon is present.24 Because of this transformation result¬ ing from differing individual situations, the outcome of the game will be a unilat¬ eral provision of public goods by the hegemon. Hegemons might also be willing to make economic sacrifices because of linkages to overall security concerns. Alternatively, rather than a benevolent hegemon which provides public goods, we might also see aggressive powers that form institutions to monitor against po¬ tential shirkers or that simply use power directly by threatening free riders. The provision of public goods might also be possible with small numbers of actors, rather than with only one in cases of hegemony.25 What might the public goods provision game look like with two players? While one might argue that the game would still remain a prisoners’ dilemma, it seems more reasonable, given the jointness of the good, to consider the game as one of chicken: each actor would like the other to pay for the good, but the joint nature of the good means that free riders will not impair one’s own consumption. The exact form of the game in this case will depend on the size of each of the two players in comparison to the overall cost of providing the public good.26 In the case of common pool resources, as noted above, the problem of provi¬ sion and maintenance of such goods is more severe than for public goods because of the lack of jointness. Following the logic of the relationship between individual situations and public goods, we would expect the resulting hegemonic and bipo¬ lar provision games in the CPR case to mimic those in the case of public goods discussed above. However, in view of the lack of jointness, both the suasion and chicken games will have worse payoffs both for cooperation and defection, thus potentially making it more difficult for actors to come to agreement on the devel¬ opment of such goods. Yet this pessimism may not be fully warranted. While the lack of jointness inherent in CPRs makes it less likely that a hegemon would be willing to provide the good, this very “crowding” may actually stimulate the pro¬ vision of CPRs. Hegemons in CPR cases will be more likely to encourage joint provision of goods through coercive means. Thus, possible free riders may be brought into the fold since their nonparticipation in providing a good has direct consequences for the supply. If they are then forced to pay for the good in ques¬ tion, the hegemon’s initial investment and maintenance costs will be lower. Drawing on neoliberal ideas, I maintain that CPRs in an institutionally thick context should clearly stimulate group activity in monitoring and possibly sanc24 Martin 1992. 25 See, for example, Snidal 1985b. 26 See Aggarwal and Dupont (forthcoming) on a more formal treatment of the relationship between goods, individual situations, and institutions.

12

Reconciling Multiple Institutions tioning because of the negative implications involved in free riding. Thus, it is likely that there will be more active participation by all members, and therefore, less likely that the good will be eroded over time. And finally, drawing on a cog¬ nitive perspective, actors may redefine their interests in view of the potential ben¬ efits of cooperation and be less likely to shirk in the provision of GPR goods. With respect to private versus patented goods, I would hypothesize that the strong benefits that accrue to actors from the provision of patented goods will stim¬ ulate competition to provide the good. Thus, in an institutional setting, if benefits can be gained by “selling” the good to possible new members of an institution, we should see competition among groups of states to encourage nonparticipants to join their arrangement. The game in this case would look much like a coordina¬ tion game, with each party vying to have its own institutional form adopted. In the technology standards area in a private setting, attempting to set up one’s own stan¬ dard as the national or global standard parallels this institutional hypothesis. In sum, as suggested in this section, bargaining among actors—based on the games defined by goods, individual situations, and institutions—yields payoffs that are likely to vary for the actors involved in the initial negotiating game. For example, as Cohen’s chapter notes, France and the United States responded quite differently to the 1973 Oil Shock because of differences in their individual national situations. Initially, they split over how the crisis should be addressed. Subsequently, as Cohen’s chapter notes, they also disagreed over the appropriate type of institutions and the relationships among them that might be used to cope with this shock. To this point, we have considered the factors that interact to create a static bargaining game. Faced with the payoffs that result from their initial strategic in¬ teraction, states may simply accept the outcome of their bargaining. But the game may not simply end at this point: indeed, actors are likely to make efforts to alter the bargaining game in which they find themselves in order to improve their payoffs in a new game structure.27

Actors’ Options and Institutional Outcomes

When will actors make efforts to promote game change? Logically, they con¬ sider the existing payoffs in the current bargaining game and compare these

27 See Aggarwal 1996 for a discussion of game change efforts in debt rescheduling. For applica¬ tions to other issue-areas, see Aggarwal and Allan 1994. While from a game theoretic standpoint, the choices that actors make in subsequent bargaining rounds are simply choice points in an elaborate extensive bargaining game, the notion of “game change efforts” provides a useful metaphor. This idea allows us to distinguish between the repeated play of the game within existing constraints, and efforts to improve one’s payoffs by modifying the constraints themselves.

13

Vinod

K.

Aggarwal

with their projected payoffs from instituting some form of game change. To make this calculation, states evaluate their ability to secure more favorable out¬ comes by assessing their own power resources in light of their own individual sit¬ uation and that of their opponent or opponents. The relevant power resources that they might use include material capabilities (either issue specific or overall), appeal to like-minded allies, and institutions as a power resource.28 Figure 1.3B identifies the choices that actors might make in the initial bar¬ gaining game in an effort to improve their payoffs, and serves as the basis for examing game change in the empired chapters. Actors have three options. First, they can attempt to directly manipulate the types of goods involved in negotia¬ tions, say by forming an alliance that excludes other actors. Second, they can alter either their own or their opponents’ individual situations. These could in¬ clude such efforts as overthrowing governments, building up one’s own capabili¬ ties in specific issue-areas, or attempting to change the views of decision makers in other countries. Third,—the primary focus of this book—they can change the institutional context within which actors are operating. It is worth keeping in mind that such institutional change strategies may indirectly influence the goods in¬ volved in the negotiations and may well change actors’ individual situations. Given our emphasis on institutional strategies to alter games and influence bargaining outcomes, actors seeking to make game changes must make several additional decisions. Specifically, they must (1) decide if they would be better off by creating a new institution or modifying existing ones; (2) choose the char¬ acteristics of the institution that they want, specifically, the institutional scope; (3) select the bargaining route they want to follow; and (4) decide whether to en¬ gage in issue linkages, and if so, the type and nature of these linkages. Option 1: Alter goods

Payoffs to actors from initial game

Option 2: Change individual situations Nature of change effort

Institutional scope

Bargaining route

Issue linkages (types and nature)

New game and possiblv new payoffs

FIGURE

1.3B.

Institutional game change efforts

28 For a discussion and use of these power resources in different bargaining situations, see Aggarwal and Allan 1983, Allan 1984, and Aggarwal 1996. From a neorealist perspective, Waltz (1979) discusses the options of self-help and appeals to alliances as options for states.

Reconciling Multiple Institutions Nature of Change Effort When faced with unsatisfactory payoffs, states may seek to develop a new in¬ stitution. For example, as noted, when several states in the Asia-Pacific became worried about the prospects for a successful conclusion to the Uruguay Round of trade negotiations, but at the same time did not wish to undermine GATT, they decided to pursue the formation of APEC within a GATT umbrella. Actors could, of course, decide that a new institution is not warranted. In this case, they may bargain within the context of the existing institutions of the initial bargaining game and promote modifications through, for example, the development of new linkages.

Characteristics of Institutions: Institutional Scope If a state decides to pursue the formation of a new institution, it must decide on its institutional scope: bilateral (such as the Canada-U.S. Free Trade Agree¬ ment) or multilateral (such as APEG). It must also decide on the institutions’ specific characteristics with respect to the strength and nature of the arrange¬ ments. But if a state decides that a new institution is undesirable, it could still work to modify it, possibly by changing its institutional scope (as with the expan¬ sion of the Canada-U.S. Free Trade Agreement to include Mexico). The next stage in the process is to decide on an appropriate bargaining route.

Bargaining Route As indicated in figure 1.3B, states may choose to bargain multilaterally or bilat¬ erally or take unilateral actions to achieve their ends.29 Turning first to the bar¬ gaining route within an existing institution, although multilateral negotiations in a multilateral institution are common, states can also pursue bilateral and unilateral strategies—despite the existence of a multilateral institution. For example, even though the United States was involved in the Uruguay Round trade negotiations, it continued to discuss specific issues with Japan on a bilateral basis and took uni¬ lateral actions with respect to other states using specific GATT provisions. What about the use of different bargaining routes for the creation of a new in¬ stitution? In the case of multilateral arrangements, multilateral strategies can in¬ clude coalition-building efforts. States can also use bilateral and unilateral strate¬ gies by imposing agreements on other states through either bipolar cooperation or hegemonic imposition. By contrast, if the institution in question is a bilateral one, it is less obvious theoretically how states might pursue a multilateral bar¬ gaining route. An example of this could be where actors engage in multilateral 29 On the use of unilateral, bilateral, and multilateral approaches, see Diebold 1952, 36.

*5

Vinod

K. Aggarwal

negotiations and then decide on an appropriate bilateral regime for a subset of the states involved. The emerging regime guiding relations between the PLO and Israel, resulting from negotiations in a multilateral forum, fits this notion.

Issue Linkages and Institutional Reconciliation The final decision node in figure 1.3B concerns actors’ decisions to link either issues or institutions in negotiations. In addition to choosing whether or not to engage in linkage formation, they must also make two other choices, so as to es¬ tablish the type of linkage (nested or parallel) and the nature of the linkage (tac¬ tical or substantive).30 We have already given detailed consideration to the concepts of nested and parallel linkages. This distinction taps into one key dimension of the linkage issue. Will parallel linkages among issues or institutions be perceived as forced, owing to power plays, or as a logical division of labor that ensures compatibility among issues or institutions? And will a hierarchy of institutions be driven by power considerations or an accepted ranking of goals among the participants? To address this latter consideration, we must look at the nature of linkages. By considering the nature of linkages, we highlight the intellectual basis of the con¬ nection between issues. If two issues are seen to be unrelated but become tied to¬ gether in negotiations, this can be considered a power-based connection or tac¬ tical link. By contrast, if the issues exhibit some intellectual coherence, then the linkage can be labeled substantive. Table 1.1 presents the alternatives under dif¬ ferent conditions. Substantive linkage will likely result in the creation of a stable issue-area and most likely a stable institutional arrangement. This outcome arises from bargain¬ ing whereby one actor convinces another (the target) of the impact of externali¬ ties involved in a particular set of negotiations and is able to convince its counter¬ part that issues are logically packaged. As we shall see, substantive linkages should lead to more stable institutions because actors are more likely to accept this type of issue packaging as a logical connection between or among issues. The second type of manipulated linkage, failed substantive linkage, is more complicated. Here, even though experts agree that two issues are interconnected (such as access to markets for trade and the ability to service debt), policymakers in the target country do not recognize the issues as substantively linked. Instead, they perceive the issues as only tactically related.31 Without changes, even though 11 For a discussion of tactical and substantive linkages, see Oye 1979, Stein 1980, and E. Haas 1980, among others. Building on Haas’s contributions in particular, I elaborate on the nature of link¬ ages in Aggarwal 1996 from which a portion of the following discussion is drawn. 31 Haas (1980) refers to what I term “failed substantive” and “failed tactical” linkages as “frag¬ mented” linkages but does not distinguish between the two different types identified here.

16

Reconciling Multiple Institutions table i. i.

The dynamics of issue linkage

Linkage type

Objective

Target decision

Basis for issue

reality

makers ’ perceptions

connections

Outcome

Substantive link

Connected

Connected

Knowledge

(1) Stable issue-area

Failed substantive

Connected

Unconnected

Power

(2) Temporary

link (perceived

solution to

as tactical)

externalities

Tactical link

Unconnected

Unconnected

Power

(3) Unstable issue-area

Failed tactical link

Unconnected

(perceived as

Connected

Misunder¬ standing

substantive)

(4) “Contingent” (to unstable issuearea if consensual knowledge changes)

the target actor treats the issues as connected, this will prove to be only a tempo¬ rary solution to the externalities problem. Such a situation may provide hope for the actor, or “linker,” trying to establish the link. When the policymaker’s initial reaction is a rejection of substantive connections among issues, experts in both countries may play a prominent role in swaying decision makers’ opinions. Thus, over time, with changed causal understanding, we may see a move to substantivelinkage-based institutions. The third type of link, tactical linkage, may foster even greater conflict. This method of connecting issues is a pure power play. If it is used as a positive in¬ ducement, it can diminish conflict. But if used as a stick, tactical linkages will create sharp conflict in negotiations and will most likely lead to unstable agree¬ ments or institutions.32 Finally, in the last case, that of misperceived tactical linkages, policymakers in the target country see the issues as substantively linked—even though they are only linked tactically. Although the target decision makers’ own experts will at¬ tempt to dissuade their policymakers from accepting the linkage, the decision makers may come to some type of joint agreement and consider the issues in question as a package. Clever manipulation by the linker could produce consid¬ erably more favorable outcomes than might otherwise be the case. But because it is based on a misunderstanding, this is an unstable situation and will lead to unstable institutional formation. Indeed, if and when the target comes to realize that the connection was tactical in nature, the bargaining connection will shift to a potentially unstable one that will only endure as long as the linker maintains its superior power. 32 See E. Haas 1980 for a discussion of this type of outcome.

Vinod K. Aggarwal

Institutional Outcomes We can now look at the possible outcomes resulting from efforts, on the one hand, to either (i) modify existing institutions (2) or create new institutions and rec¬ oncile them with the old ones and efforts, on the other hand, to understand the types and nature of linkages.33 In each of the two rows in table 1.2, the top entry reflects a convergence of perceptions on linkages, whereas the bottom entry re¬ flects a divergence of perceptions. Modifying Existing Institutions.

If we focus now on the first major row—the de¬

cision to modify existing institutions—we see there are three possibilities that we must consider: nested linkages, parallel linkages, and no linkages. The first category in the table concerns nested substantive linkages. Under that category, the top entry refers to a case of convergence of perceptions. The relationship of issues in the IMF under the Bretton Woods system was clearly ordered. Fixed exchange rates were the crucial concern. Within that context, gold provided the basis for backing the dollar. The dollar played several key roles including the numeraire, the intervention currency, and the like, and there was widespread agreement on this structuring. The Germans and some others see the EMU convergence targets for debt, government spending, interest rates, and inflation as a natural economic connection between the higher-level objective of monetary union and the subordinate goals necessary to achieve smooth progress toward fixed exchange rates in the Union. By contrast, as noted in the bottom entry of that cell, some Southern European members of the EU have exhibited considerable skepticism about this claim, viewing the connection as a tactical effort by the Germans and other Northern Europeans to control their economic policies. In this case perceptions clearly diverged. Under the category of tactical nested linkages, example (3) once again illus¬ trates convergence of perceptions. Almost all states in the United Nations recog¬ nized that the decision-making structure there, with the Security Council domi¬ nating the General Assembly, was a tactical consideration based on the power of the major players in the system. An example of divergence of views in tactical nested linkages (4) is the aid to Lome convention members for commodity price stabilization. From the perspective of the poorer members, this agreement is a substantive connection to stabilize markets. But from the perspective of many EC members it is simply a tactical exchange tied to political and economic in¬ terests in maintaining the Lome agreements. Moving across the chart to cases of parallel linkages, the relationship between the IMF and World Bank (1) provides a good example of parallel substantive 13 For ease of presentation, I have avoided discussion of two elements, the type of institution and the bargaining strategy that actors might pursue to accomplish their ends.

18

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